Reforms: clear the clutter

Economic reforms should be clear and simple, not cluttered with endless terms and conditions. This has long been forgotten by the UPA government, which tries desperately to ensure that any change satisfies several vote banks simultaneously, supposedly to ensure inclusion. This approach clutters even the most desirable changes (like the land acquisition bill) with loads of conditions, delays and red tape. A refreshing contrast comes from the new banking reforms of Raghuram Rajan, the new RBI Governor. He has decreed that any bank can now open a new branch without RBI clearance. Earlier, the RBI viewed every new bank branch as a special dispensation, to be approved only after long scrutiny. Indeed, the RBI once wanted to approve even individual ATMs, viewing these as bank branches of a sort! Rajan has jettisoned the approach of everything being forbidden till approved. By freeing banks to expand as required, subject only to the usual rules, he has produced clean, uncluttered liberalisation.

Contrast this with the cluttered approach of Anand Sharma, supposedly one of the most market-friendly ministers in the Cabinet. He championed, and won Parliament’s approval, for 51% foreign direct investment in multibrand retail. He also got Cabinet approval for 100% FDI in single brand retail. He thought this should impress all foreign investors. In fact, one year after the supposedly revolutionary new multibrand policy, not a single dollar of FDI has yet come in (though Ikea and some others will hopefully come in soon).

The distinction the government makes between single brand retail and multi-brand retail does not exist in other countries. It has no business logic, and simply tries to buy off the vote bank of small shopkeepers. If FDI in retail is a good thing, it should be allowed without clutter. If it is a bad thing, it should be banned. Sharma justified the cluttering of FDI as an India-specific model. That’s precisely the problem: India specialises in clutter that more sensible countries avoid.

Sharma obliged foreign investors in multi-brand retail to source at least 30% of their products from small companies with less than $2million of fixed investment, and to invest at least half their initial investment in back-end infrastructure. This raised so many possible complications that it took a full year to clarify all issues. Ikea said it aimed to grow rapidly in India, so the industries it bought goods from would expand rapidly too, not remain small any more. After long agonized discussion, the government agreed to the expansion of supplier companies. It also agreed to limit the mandatory 50% spending on back-end infrastructure to the initial investment tranche of $100 million.

The question remains, why are we returning to the bad old policy of small scale industry reservations? The old reservations were initially created in the 1970s, and proved terrible. They created a perverse incentive to remain small instead of growing. Some entrepreneurs split factories into several bits, each of which stayed below the prescribed investment limit. Others leased machinery instead of owning it, to escape the investment limit. The policy was conceptually stupid because it made lack of growth and productivity virtues, not vices.

When reforms began in 1991, the small-scale lobby opposed de-reservation strongly. So, de-reservation was phased in very slowly, and was finally completed by 2005. Alas, the government has now brought it back — without any explanation for the reversal. The only logic seems to be vote bank politics.

The same vote bank approach has been carried further for procurement of goods and services by government departments and public sector undertakings. Since 2012, 20% of all procurement has been reserved for small and medium enterprises. Within that 20%, a sub-quota of 4% has been fixed for businesses owned by dalits and tribals. The next step will presumably be a quota for Muslims. Salman Khurshid will doubtless demand a sub-quota for Pasmandas (dalit converts to Islam). Jaganmohan Reddy will demand a quota for dalit Christians. Nitish Kumar will demand a quota for maha-dalits (the lowest of the scheduled castes). A quota for women will follow. The possibilities are endless.

There is a lobby for everything except productivity or competition, which are the mainsprings of higher incomes and lower prices. High productivity requires the abilty of businesses to compete and grow without endless hassles and conditions. The UPA government shows no interest in raising productivity or competition, and focuses instead on a clutter of conditions, quotas and permits to woo sundry vote banks. This is a major reason for the economy’s downhill slide. Solution: more clear, uncluttered reforms of the kind Raghuram Rajan has just introduced.

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6 thoughts on “Reforms: clear the clutter”

Hi Suresh, thanks for your inputs. In 1991, on the eve of opening up of the economy, there were plenty of cynics predicted end of the road for Indian businesses, arguing that they weren’t ready to face global competition and will simply have to fold. They cited various factors like lack of financial muscle, technological disadvantage & so on and so forth. 22 yrs hence, the Indian businesses (big & small alike), have proved them all wrong. They have only flourished & have become much stronger & globally competent. Some of them have emerged as global companies in their own rights. Please don’t underestimate the enterprising spirit & ingenuity of us Indians. Make it simpler to do business here, allow foreign investment to flow in smoothly. India is ready, NOW, this moment! Indian businesses will (as shown in past 22 yrs),become more competitive in their management nuance, technology, marketing etc to thrive upon the emerging opportunities, as the economy opens up further. They will get more competitive only when the ecosystem so demands, and they’ll respond. There’s no other way, keeping a highly limited opportunity economy in a cocoon is hardly the way to make us more competitive.

Hi George, I agree with a lot of what you said in your reply. We aren’t being able to emerge as a major global manufacturing base due to factors like poor infrastructure (particularly power & connectivity), poor logistics, archaic labour laws and difficulty in starting & running a business – obtaining myriad government clearance, permissions etc. All providing fertile ground for bureaucratic corruption (I presume that you were referring to corruption when you say hafta).

My argument was solely focussed on highlighting the need for making it simpler to do business in this country. To do away with having too many restrictions & conditions for businesses to start (including foreign investment). As you know, as per World Bank ranking, we stand at 173rd in the world out of 185 countries in the ease of starting a business! and 132nd out of 185 in the ease of operating a business!! And what have we achieved by making our business climate soooo difficult?? Nothing good except encouraging govt corruption I would say. Doing more of the same by slapping one condition & restriction after the other on businesses is hardly going to get us anywhere. Such restrictions & conditions seldom produce the stated noble objectives but they simply become leverage for the bureaucrats to extract “haftas” (borrowing your term 🙂 ) from companies to grant permissions or certify that they have indeed complied with those restrictions & conditions. On the other hand, if we keep our code of doing business simple and allow companies to set-up shop here, the objectives that you pointed out in your post (1.Improving back-end infrastructure & 2. encouraing budding enterpreneurs) have a much better chance of getting met naturally, as a matter of business compulsion, rather than some special government diktat.

Commenting more specifically on the two objectives that you highlighted & want the government to achieve by slapping regulations 1) Companies being required to improve back-end infrastructure – to be competitive, all companies operating in India will have to have a robust back end infrastructure. India is a cost sensitive market, and no company can really be successful here if they don’t have HUGE local input in their supply chain. Retail chains above all. So Walmart et al, will have to improve back-end infrastructure as their existence will depend on it. Also, once they invest in the back-end here, a large number of companies have in past chosen to use their Indian base & backend to service their regional as well as global operations. 2) Encouraging budding entrepreneurs – The key theme of my earlier post was that small businesses, entrepreneurs get plethora of opportunities when Big businesses operate & don’t need some special government protection or regulation. The true end result of such government protection or regulation is simply more corruption & makes it harder to start or operate a business in this country.

Our masses desperately need a fast growing, low inflation (growth – inflation = REAL growth) economy to emerge out of poverty. We need unrestricted growth of business in this country, that’s the only way to grow the pie, grow the wealth. You can’t grow wealth & grow the pie through government regulations, that only ends up thwarting growth & encouraging corruption.

While i agree on Kunal’s stance, doesn’t government have the moral obligation of ensuring that existing businesses do not suffer with lack of market breadth. Considering India’s penchant for low cost products, the small businesses will certainly face closure due to lack of financial muscle or will have to fight back with consortiums. The so called hinderances & complications are required only to buy time for these small businessmen and vendors to choose between the above. Am sure at some point in near future, the policies will become more simpler; by then India will also be ready to face the global competition (I am certainly hoping so)

You trash the socialist mindset and explain a good eco system you have witnessed yourself. Not sure what you are trying to explain. Small or Big Indian Player.. Everyone is good at cooking books.. Only MNCs may try to play safe with the books but I am sure they too will have their innovative ways.. If you think jobs have moved from India to China because of our socialist mindset, you are grossly wrong again. China has managed to poach the entire world of manufacturing making use of their ruthless system. While the west cannot afford manufacturing due high labour cost, our cost of production is high due to taxes, haftas, poor logistics, inadequate water and power, etc. Our only saving grace is the IT and BPO industry. And of course the human capital we provide to the whole world in return for the international remittances. If we need to provide a fertile ground for manufacturing, we need foreign investment to improve the logistics. Taxes will never come down.. Haftas may.. thanks to the ani-corruption movement.. but I have my doubts.

Filthy rich and greedy corporates vs. smaller players (entrepreneurs)? Which socialist make-believe world are you living in George? The truth is that these so-called small players aren’t really budding entrepreneurs (small guys) but people who can cook books to showcase their factories as “small scale” and manage connections and pay-off government inspectors. Large companies don’t exist in Vacuum. They build a huge ecosystem around them. Let me give you the example of the company that I work with. I have worked in a large corporation for a long time (FMCG company). We have many thousands of small enterprises and businesses associated with us for a number of years who have all flourished through the association. At every stage of the supply chain a large number of companies are associated with us, from raw material suppliers, to semi-finished goods suppliers to marketing material producers to creative input services agencies to manpower suppliers for various promotions & facilities management to facilities management services providers to IT providers to distributors etc. The list is virtually endless, if you also consider the large number of firms associated with our supplier firms – A huge & complex ecosystem that throws up opportunities both big & small which competitive individuals / enterprises and firms routinely capture and thrive upon. Many of these are very small sole proprietorships that specialize in a certain area and provide quality service / product. All this without any government intervention or reservations and everybody being driven by profit motive (that socialists love to trash as root of all evil 🙂 ). Now lets consider the other side of our business. We also sell toothbrushes. Toothbrushes were traditionally “reserved” as a “small scale industry” which meant that we couldn’t produce them directly and had to depend on dodgy investors whose primary role was to cook books and manage government connections (pay off inspectors and corrupt officials who wouldn’t certify the enterprise as small scale otherwise); while we managed their factories and produced toothbrushes as per our design. We couldn’t mass produce because factories needed to be broken up, pushing up cost of production. Our factory in China produces more than 10% of all toothbrushes in the world! That factory could have been in India producing world’s cheapest toothbrushes while generating huge employment (which our poor need desperately), creating enormous numbers of opportunities for small & budding entrepreneurs of this country throughout the supply chain, boosting exports & bringing in dollars – the benefits are countless. What right do all the bleeding heart socialists and corrupt government have to deny poor people of this country the employment that a factory like this would have generated? What right do they have to deny the budding entrepreneurs of this country the opportunity a factory like this would have provided for them to flourish? Deny them in favour of whom? In favour of dodgy investors specializing in cooking books and managing govt connections. In favour of corrupt government officials, inspectors and politicians demanding bribes in lieu of “recognizing the enterprise as small scale”! Dear George, you seem like a good man to me. Please think this through thoroughly before falling prey to the black hole of socialism that this country has been painstakingly trying to get out of post-1991. Socialism specializes in keeping poor people poor while only the corrupt flourish.

What’s wrong in demanding retail investors like Walmart and IKEA to improve our back-end infrastructure? Allowing smaller players to flourish does not take us back to licence raj days. Even a capitalist country like US could not stop monopolies like Walmart or Microsoft. The greed of the corporates will never ignore the huge market India offers. We should bargain the best for our budding entreprenuers from these filthy rich and greedy corporates. Our budding entreprenuers should contribute more to the GDP than the corporates.